Philippines' tax authority looks at transfer pricing as one of the priority programs for 2015

This year, the Philippines’ Bureau of Internal Revenue (“BIR”) has continued its increasing focus on transfer pricing with the release of Revenue Memorandum Circular 3-2015 (“RMC 3-2015”) on 13 January 2015. Issued as part of the BIR’s efforts to achieve its challenging tax collection target for 2015, RMC 3-2015 sets forth the BIR’s 27 Priority Programs for 2015 which includes, among others, its transfer pricing program. RMC 3-2015 enjoins BIR revenue officers and employees across the country to gear their activities and projects towards these Priority Programs and thereby enhance collection efficiency. The BIR’s collection target for calendar year 2015 stands at PHP 1.72 trillion (approximately USD 39 billion) which is an increase of around 21% from the 2014 collection target. With an increasingly difficult collection task, it is no surprise that the BIR, like many other tax authorities in the region, has highlighted transfer pricing as a key focus area to collect more tax.

The transfer pricing program in RMC-3-2015 not only seeks to complement the Philippines’ first-ever transfer pricing guidelines (Revenue Regulations No. 2-2013 dated 31 January 2013 or “RR 2-2013”) but also outlines the BIR’s next steps in terms of transfer pricing enforcement. The proposed transfer pricing program will include a commercial database subscription for performance by the BIR of transfer pricing benchmarking studies and the crafting/finalization of related issuances on transfer pricing, specifically the following:

Revenue Regulations on Advance Pricing Agreements (“APA”);

Revenue Memorandum Order on Transfer Pricing Documentation; and

Revenue Memorandum Order on Transfer Pricing Risk Assessment

With this transfer pricing program, it appears that the BIR is determined to invest significant resources in order to implement RR 2-2013 and to lay down the legal and administrative framework for these core areas of transfer pricing: APAs, transfer pricing documentation and controversy.

APAs seem high on the BIR agenda with a public hearing on APA organized by the BIR in the last quarter of 2014 and amid informal reports that several multinationals in the Philippines have already expressed interest in entering into an APA with the BIR as a way to proactively and cost-effectively manage their transfer pricing risks in the Philippines. The APA program is seen by the BIR as a useful and efficient tool to secure the tax base and reduce uncertainty over tax collections.

Though RR 2-2013 requires contemporaneous transfer pricing documentation and mentions some of the details that are required to be included in transfer pricing documentation, it is considered that more guidance is required especially in terms of timelines, penalties, required database and selection of comparables. There are also questions around how the BIR, in relation to the proposed transfer pricing program, would treat the OECD’s new transfer pricing documentation guidelines issued in September 2014 which prescribe seemingly more onerous requirements on taxpayers with overseas operations (i.e. outbound investors). It is hoped that the BIR will take these and other relevant factors into consideration in crafting an RMO on transfer pricing documentation that will pave the way for clear, practical and taxpayer-friendly documentation guidelines. In addition, the proposed subscription by the BIR to a widely-recognised commercial database for benchmarking purposes is also a positive development as it would promote transparency, fairness and efficiency in the benchmarking of company returns, which is often required in the production of quality transfer pricing documentation. In particular, it helps to level the playing field between the BIR and the taxpayers in terms of identifying independent comparable companies for benchmarking of returns, and can help prevent the use of “secret comparables” which is generally seen as unfair to taxpayers.

The risk-based transfer pricing assessment is a tool used by many tax authorities in the course of selecting taxpayers for transfer pricing reviews or audits. If carried out, it could be viewed as merely an extension of the risk and industry profiling of taxpayers that has been implemented by the BIR for some time now. With capacity building for transfer pricing enforcement still an ongoing process, the implementation of a risk-based approach to transfer pricing enforcement would allow the BIR to focus its resources on specific higher-risk groups of taxpayers while also implementing its other, equally important enforcement programs. The proposed subscription to a commercial database is also believed to enhance the BIR’s current industry/taxpayer database that can be used in tax and transfer pricing audits.

We will release more details of these developments in due course.

Conclusion At this point, it would be best for Philippine companies with domestic or international related party transactions to take a detailed look at their transfer pricing compliance and risk management practices. Such taxpayers should measure these practices against the requirements of RR 2-2013 and of the OECD Guidelines, in preparation for the BIR’s implementation of its proposed transfer pricing program in RMC 3-2015.

At the very least, taxpayers should review the pricing methods that they apply to related party transactions, and prepare detailed transfer pricing documentation in accordance with RR 2-2013 and the OECD Guidelines in order to demonstrate that the pricing of those transactions satisfies the arm’s length principle. This should be done for all tax years from 2013.

We would encourage taxpayers to be proactive in their management of their transfer pricing risks through the preparation of high quality transfer pricing documentation. During preparation of such documentation for clients, we are often able to identify opportunities for further risk mitigation or for reduction of the overall effective tax rate.